Unlisted property can solve diversification problems for SMSFs: PFA

Paul Healy

More self-managed superannuation funds (SMSFs) could benefit from unlisted property funds to access diverse property investments and avoid becoming overly concentrated in just one or two assets, according to Property Funds Association.

‘Concentration risk’ from a lack of diversification among SMSFs was recently in the spotlight as ATO recently reviewed SMSFs using Limited Recourse Borrowing Arrangements (LRBA) where money has been borrowed to buy direct property, often a single asset which represents more than 90 per cent of the fund’s assets.

This followed a report handed down by the Council of Financial Regulators earlier this year, which expressed concern over the “prevalence of property as the main asset purchased under an LRBA, most commonly by low-balance SMSFs (under $500,000) who have little investment diversification and high loan to value ratios (LVRs), making these funds particularly susceptible to shifts in the property market”.

Paul Healy, CEO of Property Funds Association (PFA), the peak industry body for the $125 billion Australian unlisted wholesale and retail property funds sector, said SMSFs can diversify across property asset classes including office property, industrial property, and emerging alternatives such as healthcare, via unlisted funds.

“Many SMSFs are putting their eggs into one basket property-wise, which is a missed opportunity when you consider the huge property investment universe available via unlisted funds.

“Unlisted funds provide access to property assets which are beyond the reach of most direct investors, including commercial and industrial and overseas assets which have performed strongly.

“SMSFs using unlisted property funds also benefit from increased diversification, from being exposed to several different properties and strategies.”

Mr Healy said unlisted property funds have delivered strong returns due to an ability to combine capital growth with income from rents, while showing lower volatility compared with equities and listed property trusts.

Research by Zenith Investment Partners, MSCI, the Property Funds Association and the Property Council of Australia has shown unlisted property has delivered strongly for the last five years, with total returns at 22 per cent per annum (to 31 December 2018) – Australian equities delivered 5.6 per cent per annum for the same period.

About Property Funds Association

The Property Funds Association of Australia is the peak body representing the Australian unlisted wholesale and retail property funds sector, currently worth more than $125 billion.

As the professional association for Australian Financial Services Licensed (AFSL) property fund managers, their advisors, consultants and representatives, we support and promote investment into unlisted property trusts, funds and syndicates, and assist members in developing and operating their businesses.